EFSF Chief Confident Rescue Fund Can Be Leveraged Fourfold, Spokesman Says
Klaus Regling, the head of the euro- area bailout facility, is confident that the fund’s reach can be increased as much as fourfold even after it was downgraded by Standard & Poor’s, his spokesman said.
Regling, who heads the 440 billion-euro ($567 billion) European Financial Stability Facility, “still expects that the EFSF’s funds can be leveraged between three and four times,” Christof Roche said today by phone from Luxembourg, where the EFSF is based. Options to leverage the fund will be in place “soon.”
With about 250 billion euros of the facility’s resources still to be committed, leveraging the fund by a factor of four would yield a buffer of as much as 1 trillion euros to help shield Spain and Italy from the debt crisis.
“One trillion euros of leveraged power is a magic figure that may go a way to restore confidence in the fund,” Thomas Costerg, an economist at Standard Chartered Bank in London, said today in a telephone interview. Investors lost confidence in the “cumbersome and complex” fund because of its perceived lack of firepower and a dearth of support from Group of 20 nations, Costerg said. “Any evidence that it has the firepower to help Spain or Italy will be viewed positively by markets.”
The EFSF, designed to fund rescue packages for Greece, Ireland and Portugal partially with bond sales, was downgraded by S&P on Jan. 16, three days after S&P stripped contributing nations France and Austria of their top ratings. Investors bid for 3.1 times the amount sold at an EFSF debt auction Jan. 17.
Finance Minister Talks
Euro-area finance ministers will discuss how to respond to the S&P downgrade at a Jan. 23 meeting, a person familiar with the matter said Jan. 17. European leaders agreed at a Dec. 9 summit to bring forward to July of this year a 500 billion-euro permanent rescue fund that is intended to replace the EFSF.
Regling told the German government after the downgrade that he was optimistic about leveraging, Deputy Finance Minister Steffen Kampeter said yesterday.
“We are on good track,” Kampeter said in an interview in Berlin yesterday. “That’s what Regling tells us.”
The EFSF said in November that it aimed to start up bond- buying and guarantee programs early in 2012, with capacity to leverage as much as 250 billion euros from its coffers, using two programs that can be deployed simultaneously.
The dual avenues of leveraging the EFSF are “both showing results,” Thomas Steffen, another German deputy finance minister, told reporters in Berlin yesterday. “Regling tells us he continues to have good talks with market participants” who “are willing and able to contribute significant amounts.”
Steffen and Kampeter both rejected a report in Germany’s Die Welt newspaper yesterday that the plans to leverage the EFSF to as much as 1.5 trillion euros were “practically dead.”
Regling told reporters in Singapore Jan. 17 that the rating change didn’t have much impact. Asia and Middle East investors are still buying EFSF bonds, Regling said.
The bond insurance program will guarantee 20 percent to 30 percent of the principal amount of new sovereign bonds issued by euro countries. These “partial protection certificates” can be detached and traded separately.
Under option two, the creation of one or more Co-Investment Funds would allow the combination of public and private funding with the aim to buy bonds in the primary and/or secondary markets. In the case of primary bond purchases, the money could then be used for bank recapitalization.
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